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Friday, November 16, 2012

Privatizations - reality or illusion?

The draft of the latest Troika-memorandum (MoU2) lists 34 transactions to be completed by the end of 2014. They break down into the following categories:

Share deals:

15

Concessions:

11

Real Estate:

8

If the idea is to use the proceeds of these privatizations for repaying debt (which I believe it is), then I would enter a wager that these privatizations will not happen. Certainly not as long as Greece remains in the Euro-limbo. At the same time, I explain below why they should happen and how.

If the government proceeds as planned/committed, there will be mass demonstrations every time a privatization comes up. The battle cry will be: "We cannot sell state assets now because we may need them if and when we exit the Euro!" A rather convincing battle cry. How the government will withstand those battle cries escapes my imagination at present.

Having said this, I reaffirm my conviction that privatizations, in principle, are the route to pursue. My principle argument is know-how transfer. Even though some of these companies may perform quite well now, there is no question in my mind that they would all benefit significantly from the know-how which a new owner brings.

Thus, the critical decision is to choose the right new owner. It's easy to describe what a wrong new owner would look like. Examples: a financial investor who is aiming at short-term returns; a multinational who is exclusively interested in buying market share; etc.

The 'right' owner would be an owner who has a commitment to Greece as a location for doing business in the country and, possibly, to use Greece as a hub for the Eastern Mediterranean region. Thus, the 'right' owner would not only lay out money for the acquisition but, above all, he would commit to substantial new investments going forward. The experience with the Chinese company Cosco and the port of Piraeus comes to mind.

Whenever the state tenders a company for privatization, the rules of the tender and the criteria for selection must be published. I would suggest that the top criteria should be 'the right owner' with a clear definition of what is meant by that.

Now to the proceeds of the privatizations and I begin with the example of the German state of Bavaria. About 30 years ago, Bavaria was considered as the Southern fun and beer loving state which required transfers from the North to support the living standard of Bavarians. Then, the Bavarian government took a historic decision whose consequences can be witnessed all over Bavaria today. The state sold assets on a massive scale. However, instead of 'spending' the sales proceeds, the money was invested into making Bavaria competitive: research & development, education at all levels, clusters for future-oriented technologies and industries, etc. etc. And, incidentally, Bavaria is still fund and beer loving!

Today, Bavaria is probably Germany's most successful state and the largest contributor to the domestic transfer system in Germany. Bavaria's educational system is considered the best in Germany. R&D centers exist all over the state. Clusters for future-oriented industries are in place. Some entirely new industries are now settled in Bavaria (e. g. aerospace). Etc. etc.

This could be a role model for what Greece should do with privatization proceeds. Greece's creditors will not allow that? Well, that depends. If the state were to re-invest funds in similar fashion as the state has invested in the past, then one certainly should not allow that. However, it should not be too complicated to find a structure where the decisions to re-invest are supervised by invididuals/institutions which can assure that the Bavarian model is followed (and not the Greek model repeated).

If, and this is the million-Euro-assumption, if it could be warranted that Greece would follow the Baravian model for re-investing sales proceeds from privatizations, the creditors would be foolish not to support that. A strong Greece in the future could pay back a lot more debt than a bankrupt Greece can now!

11 comments:

I regret to say that I am not as sanguine about this issue as you are.

The basis of my thoughts is the Cosco takeover of Piraeus. Whilst investment has been made - it has not been in the workforce who are not treated with the fairness one expects in Europe.

The core of my argument is that Greece has never seriously invested in its profit-generating industries. It has always sought the easy way out. That is in stark contrast to places like Bavaria where politicians have some backbone - and vision.

The more serious element of this argument is that Greece is not in a position to invest in anything save keeping wolves at bay. They still have a deficit that needs paying, with or without any debts they incurred historically.

It is a very nasty corner to find yourself in. For all the will in the world, small entrepreneurs growing businesses from the seed will not provide the kind of tax revenue that the country needs for a turnaround.

This is a good plan, but I am not sure how relevant it is in the Greek context. I assume Bavarian state assets were run fairly efficiently. Greek state assets are not. They are run as an extension of the political system. They provide political black money (lots of it) and sinecures for various lazies that are paid in exchange for votes. Both in unsustainable proportions.This method is institiutonalized. Each group (taxi drivers, lorry drivers,goldsmiths, power company workers, lawyers, workers in Rodopi company in Epirus etc) has its own political office to protect them. This protection mainly means that a monopoly of some sort is maintained and tax provileges are granted generously. In exchange the protector is getting black political money (often lots of it) and the ability to grant sinecures. Notice: the office protects, not persons. So if the Transport minister is the protector of taxi drivers the day the new minister takesthe oath, a guy with a bag of cash appears and asks the minister what to do with it. The old minister is immediately cut off. Whether the minister is left, right, in between or whatever is irrelevant. A similar system operates in public works: for somebody to enter the charmed circle of state suppliers he must deposit Letters of credit valued at fixed percentage of the income it will be received by the statefor the year. This amount was divided between PASOK, ND and the communist party.(10:5:1 Government, opposition, communists respectively. This was valid until the last elections). Given such a system I believe it is better to give away state assets if necessary. The priority must be in breaking the political stranglehold. It is this stranglehold that will create the opposition you mention. Economic considerations can only follow the braking up of this mob, that is going to blackmail any potential investor out of its shirt. The reason COSCO is so succesful it is because its too big to be blackmailed. Hence the efforts to kick it out(including the efforts of G. Papandreou)

I liked your post about the most dangerous bank in the world. It was very illuminating.

One thing we can be fairly certain about is that HP probably wouldn't have selected Piraeus as the site for its new logistics centre for SE Europe & MENA if Cosco wasn't running the Cargo Port. They might have chosen Ambarli, or more likely kept the status quo - everything in Rotterdam - hoping for Trieste to fulfil on its promises. One hopes that HP's lower costs will result in lower prices for its customers - retail & commercial. Hewlett-Packard picks Piraeus

The Greek state owned rail network Trainose does not have a freight link to Piraeus - something that the HP deal is contingent upon.

I wonder how the building of the freight link is being funded. It's something the EIB ought to be doing, it's funding light rail in Nottingham, it funded those empty super-fast trains in Spain - alas there are not many votes in freight lines. Its also something the Greeks should have done last century, or the one before that.

Trainose, the Greek rail operator is up for privatisation, current bidders include

Can't agree with theAthensdog suggestion that it would be better to give away state assets. Unless your objective is to add to the wealth of existing Greek oligarchs and/or create a few new ones - a'la Russia, Ukraine etc.

I also don't like the idea of selling a state-owned monopoly like Trainose, lock, stock & barrel, to a foreign state-owned monopoly. Better to break it up into passenger, freight, infrastructure (maybe retain state ownership), and properties. Maybe it's not too late to do that.

On the Logistics front, there appear to be people taking up McKinsey suggestions. Or perhaps McK's took their ideas. It often happens that way, to get your ideas accepted you have to get an outfit like McK or BCG to give them legitimacy. OK you may not get the kudos but you get the satisfaction of seeing your ideas implemented - with luck you might even get to do some of the implementing.

Another green shoot - Unilever is looking to expand its manufacturing in Greece.

Cosco is a success in more ways than one.Apart from the fact that it has brought lots of traffic and investment in the port, it is also the only stable business and employ- ment environment in the country right now.It has fantastic growth rates (100% from last summer to this one) and it is the biggest Cosco terminal in Europe. Its major success is that it has successfully defanged a cancer of Greek econo- my: the influence of the communist party on the port. The communist party is run as a protection racket for the profit of its cadres. One way of getting money is througha kind of legitimate extortion of shipping interests: po- litical donations in exchange for no strikes;all port unions are communist controlled.This racket is collapsing, hence the screams about workers' maltreatment that appare- ntly reached even Gemma. True, COSCO is not paying the regular salary that the Greek port workers were used to, but these salaries were out of this world: there were port crane operators making 150000-250000 euros depending on the year(closed shops and other similar tricks were used). How it got that high?People "were doing" 25 hours overtime per day!!!I think it was tax free too. However, demonstrating that our world is getting smaller all the time, the real story about COSCO and Piraeus is closer to you. Just inside Hungary in the extreme NW lies the town of Sopron. It is, apparently, a huge rail tran- shipment terminal. The plan, as described in the just announced COSCO-HP-Greek Rail deal, is to ship HP containers from the East to Piraeus, put them on rail and transport them to Sopron for transhipment to Germany, Austria etc in Central Europe and elsewhere. This means two trains a day for HP only. The time savings from the present arrangements (straight to Rotterdam from the Far East or first to Piraeus and then on smaller ships to Rotterdam or Antwerp)is 10 days. HP is to make Piraeus the base for supplying C. Europe, Balkans, N.Africa, M. East and the former Soviet Union countries. Hyundai is planning to follow soon. The sums are staggering: HP has $ 120 bil income, of which 50 is logistics. Cutting 10 days in such a major market and assuming the other companies to follow have similar cost structures it can result in economies of scale that will constitute a measurable percentage of global GDP (deep in the future of course). Most of this European traffic will be routed through Sopron. Now it is understandable why the Dutch finance minister is so strict with Greece: Rotterdam portconstitutes 15% of Dutch GDP. If Piraeus takes 10% of its traffic Dutch GDP will go down 1,5%. So the Dutch are financing, at below market rates, the guys that will chop off 1,5% from their GDP.I would be strict too. The interesting question here is: what is the Austrian Government thinking?. Sopron is obviously in the Vienna sphere of influence (it is a German speaking place), not Budapest's. Do you think they like such a plan?

Very interesting! It's a cute irony of history that a company from a communist country would battle against the influence of Communists in a democratic EU-country...

Regarding Austria, I know that for ages my home state Upper Austria has been pleading for a North-South connection running throught it. In 2006, the Czech Republic, Austria and Slovenia signed a Letter of Intent for a train connection Prague-Linz-Graz-Koper. But when it comes to implementing large projects, Austrian politicians are no faster than their Greek counterparts. Just like Austria in general has quite a bit in common with Greece - but that would be an entirely separate, blog-filling subject.

Our balcony looks out to the Thessaloniki harbor. I remember, not too long ago, an interview in DER SPIEGEL with the head of the Workers' Council of that harbor who prided himself for having successfully boycotted the privatization of it. From the distance, I see a few ships (at the most). In wild dreams, I could see a Hong Kong-type busy-ness there with containers being unloaded on trains and modern trains fanning out all over Southern Europe (and, of course, containers being loaded with Greek exports!). So much for dreams...

I am really glad to hear that Cosco is a success story all the way around. Only talking about foreign investment is not enough because people cannot picture what it really means. When you have a prototype, it's a lot easier to convice people. What baffles me is that there is not more discussion in Greece about what seems to have been a success story all around with tremendous potential for the country's future!

Starting from the last point: why Greeks behave this way. I am trying to find an example of how Greeks waνt to organize their economy.There are scientific descriptions : Greece is organized as an Ottoman/Byzantine state or is organized as a medieval state with the barons controlling sections of the economy rather than sections of land or it is a communist state. All these are correct but they don't seem to give a gut feeling of what they mean. So after lots of search I discovered the following:http://en.wikipedia.org/wiki/Rationing_in_the_United_Kingdom. This wiki explains how the economy was organized in wartime UK. If Greeks are left to their own devices this is how they want to run the place, including many who should know better or they are at first sight real capitalists.At least the majority does. This is the result of various historical reasons that will take too long to explain. However the last 50 or so years of high consumption have created the additional want of a German or US standard of living.This is what a marxist economist will δescribe as a contradiction that leads to systemic collapse. I agree with such an analysis: you cannot have both. Greek politicians bypassed the contradiction with borrowing for consumption, with the well known end results. Mentalities do not change easily. It takes time and fear. The more the fear the faster it changes.So no discussion of COSCO success because this will accelerate the move to the abhorrent capitalist society. A primitive way to exorcise evil. As to the point of the similarities between Greece and Austria: during my ship broking days I remember that if somebody wanted sanction busting on a large scale they would come to Piraeusto get the boat and to Vienna to get the banker to do the triangular payments and to launder the money. Don't be surprised if the next Lagarde list contain a mix of related Austrian and Greek names. Continuing about privatizations. If we were in Ukraine I would have agreed with Canutelyking and you. But we are not. As I have repeated many times we are citizens of federal Euro zone stateand "Greek oligarch" is essentially meaningless.The Euro zone has been federalized from the back door: federalize everything important but make sure that you avoid the visible but irrelevant parts that exercise the plebs (say flags). Considering the rail privatization, who buys what or how is of secondary importance. The rail regulator founding legislation contains a very interesting article: Currently disused lines owned by a single company and used for cargo transport only are exempted from the regulator's overview. This article has a name: COSCO. So most of the traffic will probably go on privately owned lines. And as everybody who has been around Greece knows there are old rail lines in every route, including one that connects Athens to Patra and Pylos. This line connects the following major ports: Piraeus, Korinthos( already the base of the RO-RO ferries of the country), Kiato ( a small but important port) Aegio (a major cargo port, where all the bananas for the Balkans areunloaded), Patras (no comment) and Pylos (one of the world's best very deep water ports; even 400000 tons supertankers can birth there) This is probably the world's largest system of natural ports. So large parts of the action will be outside the privatization, as disused assets revert to the state and they don't belong to the rail company. This is major political sleight of hand. Historically what seems to be happening here is a reactivation of the southern section of the silk route. As anybody with some historical knowledge can tell the meanderings of the ships and the caravans along the route were one the most potent forces in Eurasian history. When confronted with such forces clever heads of workers councils apply for a pension. Unwise ones are sent 6feet under by the boys.

I found this blogpost where I talked a little about Austrians. My Greek wife often exclaims "you Austrians are worse than the Greeks!" My response to her is then: "That may be so, but we are better at covering it up". So much for that!

Cosco is a success story (as are some others) only because of the dismal performance of the state. For example it does not take Einstein to figure out that one should monitor the goods you are keeping. It takes greek officials to fail to do so! The real issue in Greece, as in much of the world economy is that the mindset you are looking for(i.e. looking for growth, not the easy buck) has taken a back seat because the alternative(i.e. the easy &quick buck seekers) have demonstrated again and again that they can get away with doing nothing and buying and selling hot air.